What is Price?
Economists defines price as the exchange value of a product or service always expressed
in terms of money. To the consumer the price is an agreement between seller and buyer
concerning what each is to receive.
Price is the mechanism or device for translating into quantitative terms
(Rs. & Ps), the perceived value of the product to the customer at a point of time.
Pricing is equivalent to the total offering. The offering includes a brand name, a
package, benefits, service after sale, delivery, and credit and so on.
Money (price) = Bundle of expectations or satisfactions.
A firm must set the price for the first time
1) When it develops a new product
2) When it enters into a new distribution channel/ geographical area and
3) When it caters bids on new contract work.
Price setting procedure:
1) Selecting Pricing objective
Many companies first decide where it wants to position its market offering. If
pricing objective is clear, it is easier to set price, ex: - survival, maximum market
share, maximum profit, product quality, leadership.
Prices are less important than survival. As long as prices cover variable costs and
some fixed costs the company stays in the business. For non profits organization
partial cost recovery or full cost recovery will be the objective. They rely on
private gifts and public grants.
2) Determining Demand:
Demand and price are inversely related; the higher the price; the lower the
demand price sensitivity:-
The first step in estimating demand is to understand factors which affect price
sensitivity, Nagle identified nine factors:
1) Unique value effect: - Buyers are fewer prices sensitive if product is more
2) Substitute Awareness effect: Buyers are less price sensitive when they are
less aware of substitutes.
3) Difficult comparison effect: Buyers are less price sensitive when they cannot
easily compare the quality.
4) End Benefit Effect: Buyers are less price sensitive of product has smaller cost
of production of end product.
5) Total Expenditure Effect: lower expenditure when compare to their total
6) Share Cost Effect: Buyers are less price sensitive when a part of the cost is
borne by another party.
7) Sunk Investment effect: When the product is used in conjunction with assets
8) Price Quality Effect: when product is assumed to have more quality, prestige
9) Inventory Effect: When they cannot store the product.
3) Estimating Costs:
Company wants to change a price that covers its costs of production, distribution
and selling cost and plus a fair return for its efforts.
Types of costs/Levels of Production:
Fixed cost and variable costs
Fixed costs are the costs and don’t vary with production or sales revenue.
[Ex: - Rent, heat, interest, salaries and so on] regardless of output.
Variable costs are those costs which vary directly with the level of production.
Total cost = Fixed cost + Variable cost.
Average cost = Cost per unit (or) Total Cost
4) Analyzing Competitors cost’s prices and offers:
First must take competitors costs, prices and possible reactions into account.
If firm’s product is similar to a major competitors offer, then the firm will
have to price close to competitor’s price
5) Selecting Pricing Method:
Market price, Target return pricing, perceived value pricing, going rate policy,
sealed bid pricing and so on.
6) Selecting the final price:
Must consider additional features like psychological pricing Ex: - Rs.999 out of
Rs.1000 price as an indicator of quality.
Influence of other marketing mix elements.
1) MARKUP PRICING:
It is a method to add up a standard markup to the products cost.
Variable and fixed cost per unit is added and the desired profit margin is added to
the total cost.
Ex: - Variable cost (V.C) per unit = 10
Fixed Cost = 3, 00,000
Expected unit sales = 50,000 units
Unit cost = Variable cost + Fixed cost
= Rs. 10 + 3, 00,000
= Rs. 10 + 6
= Rs. 16/-
Mark up price = Unit cost
1 – Desired return on sales
= Rs. 16
Companies introducing a new product often price is high to recover their costs as rapidly
2) TARGET RETURN PRICING:-
Target rate of return on investment (ROI)
Investment = Rs.10, 00,000.
Wants to set price to earn 20% ROI
Target Return Price = Unit cost+ desired profit + Invested capital
= Rs.16 + 20 x Rs.10, 00,000
=Rs. 16+4 = Rs. 20/-
Break Even Volume = Fixed Cost
Price – Variable cost
= Rs.300, 000
Rs.20 – Rs.10
= 30.000 units.
Break Even Analysis
The sales price per bag to the dealer is Rs.70 If variable costs are equal to Rs.35 and
selling and other direct expenses are Rs. 15. The total variable cost is Rs.50 The
contribution to profit and overhead per unit is Rs.20 (Rs.70-Rs.50)
Unit Contribution = Selling price- variable costs
to fixed costs per unit per unit
Selling price = Rs.70 per unit
Variable cost= Rs.50 per unit [Rs.35 + Rs.15]
B.P. = Rs. 20per unit
Fixed cost = Rs.100, 000.
B.E.V. = F.C FC
SP - VC OR Contribution
B.P= 1, 00,000 1, 00,000
70 – 50 = 20 = 5,000 units.
To obtain Break Even Point in rupees, 5,000 units are multiplied by selling price
Rs. 70 per unit
B.P = Rs. 70 x 5,000 units
= Rs. 3, 50,000
If the selling price is Rs.70 per unit, the BEP is
BEP = 1, 00,000 1, 00,000
75 – 50 = 25 = 4,000 units.
3) PERCEIVED VALUE PRICING:
See the buyers perceptions of value not the sellers cost as a key to pricing. They use other
marketing mix such as advertising sales force, to build perceived value so buyers mind.
If customers perceive prices to be higher than the value that they receive from the
product, they switch over to competitors products. If the prices are lower than the
perceived value of customers, the company is losing out on profits that could have
accrued by charging higher prices.
4) VALUE PRICING:
Several companies have adapted value pricing in which they charge a fairly low price for
a high quality offering.
5) GOING RATE PRICING:
Price is more or less then competitors demand and supply. All companies charge the
same price and smaller players follow the price set by market leader.
6) SEALED BID PRICING:
Concentration is how competitors will price rather on a demand and supply. The firm
wants to win contract and winning normally requires submitting a lower price bid.
7) MARKET ORIENTED PRICING:
Rapid skimming pricing: - High price and high promotion expenditure
Slow skimming pricing: - High price with low promotional expenditure
Rapid penetration pricing: - Low price with heavy promotional expenditure
Slow penetration pricing: - Low price with low promotional expenditure
Factors Influencing Pricing Decisions:
1) PRICE QUALITY RELATIONSHIP
Customers uses price as an indicator of quality. Price strongly influences quality.
If a product is priced high, the customer perception is that the quality of the product
must be higher.
2) PRODUCT LINE PRICING
Some companies prefer to extend their product lines rather than reduce price of
existing brands. They launch cut-price fighter brands to compete with low price
rivals. This has an advantage of maintaining image and profit margins of existing
The company should be able to justify the price what it is charging for a product.
Consumer product companies have to give clues to the customers about high quality.
A company should be able to anticipate reactions of competitors to its pricing policies
Ex: - A company reduces its price to gain market share one or two competitors can
decide to match the cut, because they can easily copy. But all competitors are not
same and their approaches and reactions to pricing moves of the company are
5) NEGOTIATING MARGINS
Actual price paid is less than list price because company offers order-size discounts,
fast payment discounts, bonus and promotions.
6) EFFECT ON DISTRIBUTORS & RETAILORS
Sometimes list prices will be high because middlemen want higher margins. But
some retailers can afford to sell below the list to customers by managing themselves
with lower costs. They pass on some part of their own margins to customers.
7) POLITICAL FACTORS
When the price is out of ling with manufacturing costs, political pressure may act to
force down prices, intention is to abolish monopoly pricing
8) EARNING VERY HIGH PROFITS
The pioneer companies are able to charge high prices due to lack of alternatives to the
customers. The company’s high profits induce competitors to enter market. The
entry of competitors puts tremendous pressure on price and the pioneer company is
forced to reduce its price. But if the pioneer company is satisfied with lesser profits.
It can keep competitors away for a longer period of time
9) CHARGING VERY LOW PRICES
Customers believe that adequate quality can be provided only at the prices being
charged by the major companies. If a company introduces very low prices customers
suspect its quality and do not buy the product inspite of low price.
DISCOUNTS AND ALLOWANCES
Discounts and allowances are price concessions offered to traders or buyers in the
form of deductions from the list price of from the amount of a bill or invoice.
Trade discount is a kind of funal discount. It is given to the buyers buying for resale
Ex: - Wholesaler or retailer in payment for marketing functions which these traders
are expected to perform.
Ex:- The manufacturers list price is Rs.120/- he quotes trade discount at 33.33% and
15% from the list price means the wholesaler pays Rs.68/-
I.e. Rs.120- Rs.40 (120x33.33)
= Rs.80 - 12 (15% Discount 80 x 15 )
= Rs. 68 100
The wholesaler will quote Rs. 120 – 33.33%
i.e., Rs.80 to customers.
It is merely a rebate or a concession give to the trade or consumer to encourage him to
pay in full by cash or cheque within a short period of the date of bill.
Ex:-“2%, 10 days, net 30”
This indicates that if the invoice amount is paid within 10 days he will get rebate of 2%,
but if he pays after 10 days within 30 days, he has to pay full amount of the bill without
In order to encourage a customer to make bulk or large purchases at time or to
concentrate his purchases with a single seller.
Quantity discount can reduce the prices for bulk purchase order.
The manufacturer may after additional seasonal discount of say, 5%, 10% or 15% to a
dealer or to a customer who places an order who places an order during the slack season.
The manufacturer may offer promotional allowances
Ex: - Advertising allowances, window displays, free samples, free display, free training
in sales. It amounts to a price reduction of an equal amount of service expected.
It is used to create an illusion of a bargain. It is a popular practice of setting the prices at
Rs.99 ……Rs.999/- only.
MODULE – 6
Most of producers sell their goods to the final consumer through intermediaries. These
intermediaries constitute a marketing channel ( also called as trade channel or distribution
Marketing channels are sets of interdependent organizations involved in the process of
making a product or service available for use or consumption.
Several advantages by using intermediaries.
Many producers lack the financial resources to carry out direct marketing.
In some cases direct marketing simply is not feasible. Company would not find it
practical to establish small shops throughout the world to sell geem
Intermediaries normally achieve superior efficiency in making goods widely
available & accessible to target customers.
Functions of Channel:
A marketing channel performs the work of moving goods from producers to
consumers. It overcomes the time, place & possession gaps that separate goods and
services from customers.
They gather information about potential and current customers, competitors
land the other actors and forces so marketing environment.
They develop and disseminate communications to stimulate purchasing
They reach agreement on price and other terms so that transfer of ownership
or possession can be effected
They place order with manufacturers
They acquire the funds to finance for different marketing channels
They assume risks connected with carrying out channel work
They provide for buyer’s payment of their bills through banks and other
They oversee actual transfer of ownership from one organization or person to
Some functions (physical, title, promotion) constitute a “forward flow” of
activity from the company to the customer. Other functions (ordering and
payment) constitute a “backward flow” from customers to the company.
Still others (information, negotiation, finance and risk taking) occur in both
A manufacturer selling a physical product and services might require three
1) Sales channel
2) Delivery channel
3) Service channel
1. CONSUMER CHANNELS:
The producers and final customer are part of every channel.
a) A zero-level-channel also called as direct marketing channel,
consists of a manufacturer selling directly to the final customer.
Major examples are door-to-door sales, mail order, telemarketing
T.V.selling, manufacturer owned stores.
b) A one-level-channel contains one selling intermediary such as
c) A two-level-channel contains two intermediaries
d) A three-level-channel contains three intermediaries
0 level PRODUCER CONSUMER
1 level PRODUCER RETAILER CONSUMER
2 level PRODUCER WHOLESALLER RETAILER CONSUMER
3 level PRODUCER AGENT W.S. RETAILER CONSUMER
2. INDUSTRIAL CHANNELS:
Industrial channels are usually shorter than consumer channels.
PRODUCER AGENT INDUSTRIAL
PRODUCER DISTRIBUTOR INDUSTRIAL
CHANNEL DESIGN DECISIONS:
It might have to use different channels in different markets.
1) Analyzing Customer’s Desire
In designing a marketing channel, the marketer must understand the services expected by
the target customers.
a) Lot size: The number of units, a typical customer purchase on one occasion.
b) Waiting time: The average time customers of that channel wait for receipt of the
goods. Customers normally prefer fast delivery channels.
c) Spatial convenience: The degree to which the marketing channel makes it easy for
customers to purchase the product.
d) Product variety: customers prefer product variety because more chances of
choices will be available.
e) Services backup: The greater the service backup the greater the work provided by
2) Establishing objectives and constraints
Channel objectives vary with product characteristics. Perishable products require more
direct marketing. Non-perishable products require indirect marketing. Products
requiring installance or maintenance are usually sold by company channel design must
take into account the strengths and weaknesses of different types of intermediaries.